Sensex falls, rupee slumps: Is India growth story intact?

MUMBAI | KOLKATA: Stocks and the rupee wilted as investors scrambled for safe havens, fearing a financial catastrophe if Greece exited the euro zone and amid few signs of the Indian government acting in a purposeful manner to fix the nation's deteriorating finances.

But Finance Minister Pranab Mukherjee said the India growth story was still intact and that austerity measures were in the pipeline, though he admitted it was politically difficult to raise prices of subsidised petroleum products such as diesel, a step recommended by most economists.

Stocks sank to a new fourmonth low and the rupee fell to its worst close as panic gripped investors and demand from importers overshadowed the Reserve Bank of India's US dollar sales, which proved to be too little, too late.

"Falling rupee and high inflation are only the symptoms and not the cause of India's economic woes," said Sanjeev Prasad, senior executive director and co-head of institutional equities at Kotak Securities.

"They merely reflect the lack of governance, fractured politics and weak investment climate. The aversion to Indian equities is quite high currently, and reflects the disenchantment of investors with the lack of economic momentum and policy inaction"

The rupee has recorded the biggest drop since December at 1.3% to 54.49 per US dollar, making it the worst-performing currency in Asia this year. It touched an all-time low of 54.52 earlier in the day, and is down 6.6% this quarter. The 30-share BSE Sensex tumbled 1.8% to 16,030.09 on Wednesday, its worst close since January 9. Declines outpaced advances by 1.76 to 1.

The debacle suffered recently by the Indian economy has led to some speculation over whether Indonesia, rich in resources and a stable macro economy, would replace the second most-populous country in the BRICS grouping, a moniker coined by Goldman Sachs for the fastest-growing economies in the world.

On the rupee front, some called for more steps to check the slide in the currency. "RBI has used up most of the available ammunition to prevent the rupee's slide in the over-thecounter market, but without much success," said KN Dey, director at Basix Forex.

"It should now explore a special window to sell dollars to oil companies at market price, directly from forex reserves." Even if oil purchases are funded from the reserves as was done during the 2008 credit crisis, it may not be enough to stop the currency's slide since oil companies need an average of $500 million a day. This may deplete the reserves quickly if overseas fund flows do not resume.

"We don't intervene to arrest the fall in the rupee," said KC Chakrabarty, deputy governor at RBI. "RBI intervenes to check the volatility. The value of the rupee is market driven... We take steps to contain volatility if it's caused by speculation." Overseas portfolio flows have almost stopped in May, as investor sentiment took a hit following proposals to tax their gains even if the investments had the protection of a tax treaty.

Though implementation of the measure, known as GAAR, has been put off by a year, it has left a bitter taste about policymaking. FIIs have net invested 309 crore in May, a mere trickle from the near- 50,000 crore in the first quarter of the year, well before the tax proposal.

"FIIs have been spooked by a weak rupee," said Nirmal Jain, chairman, India Infoline. "A walkout by Greece from the euro zone could create a crisis of confidence, which could impact foreign inflows. The outlook over the near term remains negative."

Mukherjee blamed politicians in Greece, who are going back to voters seeking a fresh mandate after failing to agree on complying with the European Union and International Monetary Fund's conditions for a bailout, for the crisis situation. "This is the complex situation in which we are living today and we cannot ignore that," he told members of Parliament.

The domestic economic situation is not rosy either, with the worst current account deficit in two decades and widening fiscal deficit. Acceleration in prices after a brief lull due to lack of investments will tie RBI's hands in easing monetary policy.

The wholesale price index rose 7.23% from a year earlier in April, above RBI's comfort level. On Wednesday, most European indices erased losses as some investors bought amid rays of hope that European leaders could take a relook at some conditions of the bailout package for Greece in order to encourage growth.